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NovaStar Flames Out

The mortgage company is hit hard by the subprime meltdown.

Updated from Feb. 20

Shares of

NovaStar Financial


plunged 38% a day after the real estate investment trust became the latest casualty of rising problems in the subprime mortgage market.

The Kansas City, Mo., mortgage lender reported a loss of $14.4 million, or 39 cents a share, compared with a profit of $26.4 million, or 84 cents a share, a year earlier.

NovaStar said several one-time items cut into earnings, including impairments on mortgage securities, loss provisions for "whole loan repurchases" and certain securitizations, and lower mark-to-market values on securities.

NovaStar is one of several mortgage lenders that has seen its earnings hit by souring subprime loans. Subprime loans are those made to consumers with poor credit histories. Lenders are able to charge a higher interest rate on the loans as a way of protecting themselves from defaults, but delinquencies and foreclosures have recently spiked on loans issued in 2005 and 2006.

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"The credit performance of our portfolio, and specifically our 2006 originators, deteriorated during the fourth quarter, resulting in impairments on mortgage securities and additional loss provisions for loans held-in-portfolio in the REIT," says Scott Hartman, NovaStar's CEO. "Also, our gains upon securitization were reduced during the quarter because of lower whole loan prices. Furthermore, during the fourth quarter, we experienced a greater level of loan repurchase requests due to early payment defaults than we have historically."

The news comes just two weeks after shares in NovaStar rival

New Century

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blew up after the company warned it was experiencing similar problems.

Hartman said the company's current reserves are "adequate to cover the repurchase risk for all loans sold to date."

NovaStar is also considering whether it should retain the company's real estate investment trust status, it says. As a REIT, NovaStar is required to pay 90% of its taxable income as dividends to shareholders.

NovaStar says it expects to "recognize little if any taxable income" through 2011.

Shares fell $6.66 to $10.90 early Wednesday.